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GOLDMAN SACHS - GNP PREDICTION 2050

Green Shoe Option - Working Mechanism

In my article 'Green Shoe Option - An IPO's Best Friend" discussed on 22nd November 2012, I introduced you to a price stabilization mechanism and its importance during and IPO. In today's article I will discuss with you on 'How Green Shoe Option Works'

Price Stabilization
This is how a greenshoe option works: 

The underwriter works like a dealer, finding buyers for the shares that their client is offering.
A price for the shares is determined by the sellers (company owners and directors) and the buyers (underwriters and clients). When the price is determined, the shares are ready to be publicly traded. The underwriter has to ensure that these shares do not trade below the offering price. If the underwriter finds there is a possibility of the shares trading below the offering price, they can exercise the greenshoe option.

In order to keep the price under control, the underwriter oversells or shorts up to 15% more shares than initially offered by the company.

For example, if a company decides to publicly sell 1 million shares, the underwriters (or "stabilizers") can exercise their greenshoe option and sell 1.15 million shares. When the shares are priced and can be publicly traded, the underwriters can buy back 15% of the shares. This enables underwriters to stabilize fluctuating share prices by increasing or decreasing the supply of shares according to initial public demand.

If the market price of the share exceeds the offering price that is originally set before trading, the underwriters could not buy back the shares without incurring a loss. This is where the greenshoe option is useful: it allows the underwriters to buy back the shares at the offering price, thus protecting them from the loss.

If a public offering trades below the offering price of the company, it is referred to as a "break issue". This can create the assumption that the stock being offered might be unreliable, which can push investors to either sell the shares they already bought or refrain from buying more. To stabilize share prices in this case, the underwriters exercise their option and buy back the shares at the offering price and return the shares to the lender (issuer).




Such an option which was first used by the company Green Shoe (because of which it was named as Green shoe Option) is used by many companies outside India during their IPO process but is not a big hit in India. Statistics speaks of itself when we read that from 2003 to 2011, 365 IPO's were introduced in India out of which only 18 companies opted for this option which is less than 5% of the total public offerings made till today. Some of the participants in this include the IT giant TCS and Deccan Chronicle Holdings Ltd. in the year 2004, Cairn India Ltd. in 2006, Idea Cellular Ltd. in 2007, Indiabulls Power Ltd. in 2009.

During various researches done on this particular topic, researchers have considered various reasons on why Indian companies may not opt for the price stabilization mechanism, some concerns which sounded valued to me are
1) The issues where GSO is opted may not indicate the correct share prices and it will deprive “Value Investor” from purchasing shares from other investors when the price falls.
2) The legal and regulatory compliances are burdensome, due to this, the issuer companies and merchant bankers are not ready to take additional responsibility.



A survey conducted by The Economic Times said that a typical response was “Unlike in the US, SEBI does not permit merchant bankers to make money in trading. They will have to buy the stock if the price falls below the offer price, but they are not allowed to sell even if the stock value goes up. We are required to stabilise the price around the offer price for which we get a fixed fee”


I believe awareness should be conducted among the companies, underwriters, merchant bankers and investors about the importance and benefits of having GSO included in an IPO process.
SEBI being the regulator of the primary and secondary market may make GSO a mandatory clause in order to benefit the Investors and build their confidence in participating in the Primary market.

DABBA TRADING - NIGHTMARE FOR INVESTORS

We often read about dabba trading, not being permitted by the regulators. Many do not know the mechanics, and also the risk associated with it, till now. A dabba traders office is like any other broker’s office having terminals linked to the stock exchange showing market rates of stocks. However, the difference is that the investor’s trades do not get executed on the stock exchange system but in the dabba operator’s books only. This kind of operation, where trade is kept within the books of the operator is called “dabba” in the popular market terms. A Dabba operator flouts rules and regulations relating to Client Protection, which includes registrations, margins, transaction, execution and settlements. Not only has he evaded the Income tax regulations, which prohibit dealings in cash, but also service tax rules and many other mandatory requirements. If we deeply research into this subject we can understand that a dabba trader do not have the periodical derivative FNO settlement dates being followed. A dabba operator allows the client to carry forward the trade, be it in cash or in derivative segment for a period, not necessarily prescribed by the stock exchange..The settlement cycles are decided by the dabba operator, himself. There is no daily mark to market settlement if the trade is in client’s favour, whereas losses are extracted regularly from the clients.

To describe Dabba trading in lay man words , “You put money to get 100 shares, but the software will register only 10 shares officially in the market, and you will see 100 in your screen, which makes you believe that you really purchased 100 stocks, which is inaccurate”. It is not the investor who makes money, the broker who involves in trading on behalf of an investor makes the money, with 10% of cash put in their pockets illegally and unknown to the investor. Also these brokers don’t deal with successful investors, mostly targets the average and pity ones.

I believe it to be an offence, not much different from smuggling or black marketing. As a result, frequent raids are conducted on dabba trading operators in which their computers and records are seized. Those working in his office are also taken in the custody once they find such activities taking shape. If we run through the media, we can learn that the Gujarat police has conducted several raids in the past and alerted citizens. Media has also played its role in reducing the menace of dabba trading. Some dabba traders hedge their positions in the

market by partly executing the trade in the market, maybe in their own proprietary accounts or some benami names. Dabba traders disappear when the market goes against them, resulting in huge losses for their clients. The brokers who permit such activity in their branches or even sub-broker’s offices are the affected parties. Stock exchanges take

complaints against dabba trading very seriously and enforce strict penalties. Even suspension is levied, if stock exchange inspections confirm the complaint As Sensex jumps, resulting in the spurt in trading activity, dabba traders bounce back in the business. Hence constant vigilance is required.

IBN Live in one of their article revealed that Dabba trading, is still a thriving business in Mumbai, Ahmedabad, Rajkot, Jaipur and Ludhiana long after the SEBI had banned it. They claim that the dark side of this unauthorised stock trade is that it has undergone a technological makeover and paper notebooks have given way to hi-tech software. Available for Rs 2,000 to 8,000 in Mehsana, Gujarat, this software deletes one zero from the number of shares entered for trade. So, if a broker keys in hundred shares, only 10 will get fed into the official exchange terminal. However, the Dabba traders' screen will still show 100 shares. Many a times, it’s hard to understand the state of mind of the investors because some investors, for their profit, trade with these dabba traders knowing their illegal activities only because they facilitate trade with only 10 per cent margin instead of the 25 per cent as in a legal trabsaction in the Future and Option Segment (FNO). That means to buy shares worth Rs 1,000, an investor needs to deposit only Rs 100. However, it's not the investors who make money in this trade, but the brokers, who are quite often not even registered with a stock exchange.

 The clients patronizing such dabba traders may find some short-term benefits here. They do not follow ‘Know Your Client’ norms; fill cumbersome forms, sign long agreements and requirements like PAN card. Margins are bypassed and leveraging is freely available. Unaccounted cash is used for making payments rather than making payment by cheque. There are histories written in blood when Dabba shops close overnight, with traders disappearing from the locality once they see a killing in the market. They go to the extent of employing goons for the recovery of losses. In such a case, neither Stock Exchange Arbitration is available to the investor nor there is any access to customer protection funds which is of up to Rs. 100000.

Nobody has a clue about the dabba market size but it’s functioning on a large scale and it is certainly something which might beat any estimation made during research. However the figures of the Dabba Market turnover for the year 2005 was 5.72 lakh crores which then multiplied near to 24 times to 119.48 lakh crores in the year 2011 and after SEBI’s stringent action and trading policies saw this market shrinking 53.11 lakh crores till July 2012.

CORRUPTION PERCEPTIONS INDEX 2012

TOP TEN COUNTRIES WITH HIGHEST QUALITY OF LIFE

Top Ten Countries with Highest Quality of Life is based on Human Development Index (HDI). Top countries include Norway, Australia and Sweden.

Figures indicate Inequality Adjusted (HDI).

Norway - 0.846
Australia - 0.864
Sweden - 0.824
Netherlands - 0.818
Germany - 0.814
Switzerland - 0.813
Ireland - 0.813
Canada - 0.812
USA - 0.799
South Korea - 0.731

TOP TEN COUNTRIES MOST IN DEBT

The Top Ten Countries Most in Debt has been prepared on the basis of the Total External Debt of a country. (in million $).

United States - 14710000
United Kingdom - 9836000
France - 5633000
Germany - 5624000
Japan - 2719000
Italy - 2684000
Netherlands - 2655000
Spain - 2570000
Ireland - 2352000
Luxembourg - 2146000

TOP TEN FASTEST GROWING ECONOMIES

The Top Ten Fastest Growing Economies map has been prepared on the basis of the GDP growth rate of a country.

Figures indicate GDP growth rate (%).

Equitorial Guinea - 18.9
China - 9.2
Ireland - 6.5
Vietnam - 6
Sudan - 5.6
Maldives - 5.4
Chile - 5.2
Guyana - 5.0
Myanmar - 4.8
South Korea - 4.7

TOP TEN POWERFUL COUNTRIES

The Top Ten Most Powerful Countries in the world is based on the 2011.

 Figures indicate National Power Index (NPI).

USA - 0.904
China - 0.854
France - 0.844
United Kingdom - 0.825
Germany - 0.774
Russia - 0.770
Japan - 0.752
Italy - 0.696
Canada - 0.682
Sapin - 0.668

TOP TEN POOREST COUNTRIES

The Top Ten Poorest Countries has been prepared on the basis of the GDP of a country. A country with a GDP per capita of $765 dollars or less is defined as a low-income or poor country.

Figures indicate Gross Domestic Product (GDP) per capita in $.

DR Congo - 348
Liberia - 456
Zimbanwe - 487
Burundi - 615
Eritrea - 735
Central African Republic - 768
Niger - 771
Sierra Leone - 849
Malawi - 860
Togo - 899

TOP TEN RICHEST COUNTRIES

The map of Top Ten Richest Countries in the world is based on the GDP (per capita $) of each country. Top countries include Qatar, Luxembourg and Singapore.

Figures indicate Gross Domestic Product (GDP) per capita in $.


1) Qatar - 88,222
2) Luxembourg - 81,466
3) Singapore - 56,694
4) Norway - 51,959
5) Brunei - 48,333
6) United Arab Emirates 47,439
7) The United States - 46,860
8) Hong Kong - 45,944
9) Switzerland - 41,950
10) Netherlands - 40,973

PERSONALISE YOUR FINANCE

One of the best ways to get your financial affairs in order is to consult with a financial planner—someone who can answer questions about your specific goals and individual situation and guide you towards covering all your bases (from budgeting to saving enough for emergencies to consolidating student loans or planning properly for retirement).

Its turning very important to understand the need of getting an expert advise but the fact arises that we also need to make sure that we are not being imposed schemes that do not suit our financial goals. It happens that many a times based on the commission being received by the financial adviser they tend to push schemes or plans a portfolio for you which might be more of high risk asset class and is not balanced.

Many financial advisers encourage investors to chase returns and to invest in expensive actively managed funds. Advisers were much more likely to recommend actively managed mutual funds. The frequency of recommendations for actively managed funds combined with recurrent downplaying of fees helps conclude that advisers recommend the more expensive funds because it puts more money in their own pockets.

3 Tips:

1) Understand if your financial adviser is being pushy about a particular scheme.
2) Its a red flag when a product is recommended before your entire financial situation is known.
3) Beware if investment recommendations are made before quantifying how much is "Enough" to save.





 

PERCEPTION - OUR GUIDE TO RIGHT STEPS

UNDERSTAND GLOBAL ECONOMIC CRISIS

I'm sure understanding of this would be essential to connect more closer to the world of finance.

THOUGHT FOR THE DAY

“Be less curious about people
and more curious about ideas.”

                              

                                      ~ Marie Curie

India - Touching New Heights

Way Above the Rest

India is doing far better than its peers

Business Today's article on India by Shankar Sharma has some eye catching facts highlighted by the author who is the Vice Chairman and Joint Managing Director, First Global. Shankar raises concern stems from disquieting reports in the media about how foreign brokers are turning bullish on India, turning bullish on India's prospects, on India's rupee, on India's current account deficit, on India's reforms, on India's rule of law, on India's movies. However he mentions that the Wall Street biggies have never got it right on their predictions about the market.

 

The Supremo’s, the analyst and economists placed in Hong Kong and Singapore have been bullish on China and bearish on India and many Global Rating agencies like Morgan Stanley, S&P 500 had also started pushing down the progress of India and we could witness the Indian Finance Ministry and Central Bank opposing the facts and predictions laid down by these rating agencies. The downgrade had crossed all limits as the article states that few Western analysts had even stated that the "I" in BRIC should be Indonesia and not India. This could be a profound thought or research as the world economy saw a slowdown and India was also impacted by the wave.

SOME FACTS ABOUT INDIA

1) India is the fourth best performing market in the world this year, up 22 per cent.

2) The rupee has been flat through the year. China is down 4.5 per cent this year. Russia is up just three per 

cent. Brazil is up one per cent (and its currency is down eight per cent this year!).

3) Growth of Indonesia is up 13 per cent however its currency is down six per cent this year.

4)  India is 14th in terms of volume of factory output

5) India is regarded as the 15th best economy in terms of production in the services sector

India has seen some changes in its policy in the near past with the government making road for FDI (Foreign Direct Investment) in single and multi-brand retail (a long pending action that could help overpower other emerging economies). India's economy ranked 3rd largest in the world in 2011 GDP PPP (Purchasing Power Parity) with above USD 4000 bn only behind the Unites States (USD 15094 bn) and China (USD 11316 bn) as per IMF World Economic Outlook April 2012 report and PriceWaterhouseCoopers 2050 Report predicts India to beat United States and run ahead in the ranks to position itself at no. 2. India's Consumer Confidence Index (CCI) has been consistently above the world average as per Nielsen Global CCI where India stand at 119 points in Q2, 2012 and in Financial Market Development India has been ranked 21st, much better than other Emerging Market Economies (EME).

After considering the fact that India is an emerging economy and has a lot of potential we also need to keep in mind that Indian Business houses has to face a lot of challenges and has many restrictions because of the deep-rooted Indian laws, unstable political environment, significant number of people still below the poverty line and certain other such facts. India has slipped four places to 40th place in a ranking of 62 leading financial systems and capital markets, because weak institutional framework, business environment and relative instability failed to support growth as stated by the World Economic Forum said in a report released on 31 October.

Before giving a pat on its back, India has to overcome various such hurdles and also uproot the core issues of poverty and income instability. I still say and agree that India projects all qualities of being a 'Developed Economy' in the coming years.

A LESSON LEARNT

The price 
of anything
is the amount
 of
 LIFE 
you exchange 
  for it

       - Henry David Thoreau.

GREEN SHOE OPTION - An IPO's Best Friend

Many have heard of IPO or Initial Public Offering which is the function of the primary market. IPO is when a company wish to issue its shares to the general public for subscriptions for a price pre-determined by the company. Such shares subscribed by general public and allotted by the company based on criteria set by the issuing company thus get listed to the stock exchange for trading purpose of the investors or shareholders as they are rightly called.

Companies that wants to make a public appearance and wants to sell its shares for public have certain systems to stabilize their initial price movements. One such mechanism is the Green Shoe Option. A greenshoe is a clause or a condition added in the underwriting agreement of an initial public offering (IPO) that allows underwriters to buy up to an additional 15% of company shares at the offering price. This option is mainly exercised when the public demands for the shares of a company exceeds expectations and the stock trades above the offering price. In other words this option can be exercised once the share is over subscribed at the IPO stage but has a cap of 15%.

WHY THE NAME GREEN SHOE

The name "greenshoe" came from the Green Shoe Manufacturing Company (now called Stride Rite Corporation), founded in 1919. It was the first company to implement such a clause into their underwriting agreement on over subscription or exceeding public demand for the companies shares.

In a company prospectus, the legal term for the greenshoe is "over-allotment option", because in addition to the shares originally offered, shares are set aside for underwriters. This type of option is the only means permitted by the Securities and Exchange Board of India (SEBI)  for an underwriter to legally stabilize the price of a new issue after the offering price has been determined. The SEBI adopted this option from abroad and introduced this option into the Indian Capital Markets in the year 2003 so as to enhance the efficiency and competitiveness of the fundraising process for IPOs.


'Impact of Green Shoe Option in Indian Capital Market' is my final year research project for my Masters program in Finance.Many of the Indian corporate houses, Analysts and people involved with the Financial Markets are not aware of such an option.  In my next article we will see how the Green Shoe Option mechanism works which will give you a fair idea on its ability to stabilize the price movements. Keep Tracking.

FOOD FOR THOUGHT

"Real difficulties can be overcome.
It is only the imaginary ones
that are unconquerable."

~ Theodore N. Vail

FDI REPORT 2012

ASIA - PACIFIC

FDI into Asia-Pacific
India, China and Singapore attracted 57% of the projects in Asia-Pacific in the year 2011. Investment in India shows a significant double digit growth of 21% in FDI projects in 2011, the second highest being South Korea with 10% and Singapore with 7%. One of the fastest growing economy, China shares a fourth spot with Hong Kong at 6%. India's growth shows a remarkable rally following just 1% growth in 2010.

However in the Asia-Pacific region Japan and Thailand witnessed a sharp decline in FDI, the reason can be easily assumed as the impact of natural disasters that took place in both the countries. For the year 2011, Thailand and Japan shows a massive decline of -35% and -25% respectively. The top-performing country for attracting new jobs was China, which saw just over 340,000 jobs created as a result of inward FDI.


FDI out of Asia-Pacific
Analysing FDI overseas, Japan, India and China accounted for more than 60% of FDI projects from  Asia-Pacific countries in 2011. Japan remained the dominant outward investor, establishing more FDI projects overseas than India and China combined. Japan’s position is even more important when the size of projects is considered, with Japanese companies creating nearly 300,000 jobs overseas; 40% of total overseas job creation generated by Asia-Pacific countries.

Of the major investing countries, Hong Kong and Australia recorded the fastest growth in outward FDI projects, with percentage growth rates of 23% and 21%, respectively. In Thailand, flooding over the monsoon season seems to have encouraged domestic companies to invest overseas. In terms of capital investment overseas, Indian, Hong Kong and Vietnamese companies each increased their outward FDI by more than 70% in 2011.

TURN YOUR FINANCIAL LIFE AROUND

Why do so many women delegate their financial security to a spouse or significant other and allow divorce or death to plunge them into poverty? Why do so many women spend more than they earn and become mired in debt?
There is a direct correlation between a woman's personality, characteristics and her financial habits. Assertiveness, openness to change, and an optimistic outlook are the qualities that tend to lead to smart money choices.
Our problems with money are manifestations of problems in our life and relationships. Work on the money issues and many of the other problems will take care of themselves; or, work on the other problems and the money problems will take care of themselves.
For many people, money is an emotionally charged issue. It may represent power, or love, or control, especially in relationships. Our beliefs about money and our emotional attachments to it strongly influence the way we spend and handle money.
If you aren't where you should be financially, examine what drives you emotionally when it comes to money and try to figure out the psychological stumbling blocks that keep you from becoming financially independent. Here are ten of the most important things women can do for themselves and their financial future:

1) Don't rely on someone else, like a husband or boyfriend, for your financial security. Educate yourself about money management and investing. See Overcoming the Financial Gender Gap.

2) Set goals - it's key to financial success. See Building a Balanced Financial Plan and Setting Financial Goals.

3) Spend less than you earn - it's the secret to creating wealth.

4) Get an education. People with college degrees make on average significantly more money than those who don't have degrees.

5) Build an emergency fund. Without one, losing your job or incurring a large unexpected bill could force you to take on heavy credit card debt, and could put you into a financial hole that will be difficult if not impossible to dig your way out of.

6) Be involved in the day-to-day management of your family's finances, and talk about money with your spouse.

7) Don't take on your partner's or spouse's debt when you marry. Wait until you're both out of debt before tying the knot, or protect yourself with a pre-nuptial agreement. They're not only for the rich.

8) Don't let the fear of losing money, fear of failure, or fear of the unknown stop you from investing.
  
9) Learn from your money mistakes. Don't let them hobble you.

10) Your financial security is dependent on your attitudes and beliefs about money and your willingness to take your financial future into your own hands.

Analyzing India’s Competitiveness: Insights from the Global Competitiveness Index (Deloitte Analysis)

World Economic Forum (WEF) came out with The Global Competitiveness Report 2011-2012 as per which Switzerland continues to top the overall ranking in Global Competitive Index (GCI), characterized by an excellent capacity for innovation and a very sophisticated business culture. Singapore has moved ahead to claim 2nd position this year. Sweden, Finland and United States rounds up the top five. European economies continue to prevail in the top 10 with Germany, Netherlands, Denmark, Japan, and United Kingdom following suit.
India ranks 56th out of 142 economies in the GCI for the year 2011-2012, down five ranks from the previous edition.
India‘s performance remains quite stable but with a decline in score by 5 points. India‘s competitveness is based on its large market size and good results in more complex areas including financial markets, business sophistication and innovation. Up by one position to 26th place, China reinforced its position within the top 30. Brazil is at 53rd (as compared to last year of 58th). China and Brazil are the BRIC countries to improve its rankings this year. Russian Federation is at 66th positions (compared to last year of 63rd position). India and Russia have declined in their rankings this year.

MOST IMPORTANT ECONOMIC INDICATOR's

    Economic Indicators: Beige Book
    Economic Indicators: Business Outlook Survey
    Economic Indicators: Consumer Confidence Index (CCI)
    Economic Indicators: Consumer Credit Report
    Economic Indicators: Consumer Price Index (CPI)
    Economic Indicators: Durable Goods Report
    Economic Indicators: Employee Cost Index (ECI)
    Economic Indicators: Employee Situation Report
    Economic Indicators: Existing Home Sales
    Economic Indicators: Factory Orders Report
    Economic Indicators: Gross Domestic Product (GDP)
    Economic Indicators: Housing Starts
    Economic Indicators: Industrial Production
    Economic Indicators: Jobless Claims Report
    Economic Indicators: Money Supply
    Economic Indicators: Mutual Fund Flows
    Economic Indicators: Non-Manufacturing Report
    Economic Indicators: Personal Income and Outlays
    Economic Indicators: Producer Price Index (PPI)
    Economic Indicators: Productivity Report
    Economic Indicators: Purchasing Managers Index (PMI)
    Economic Indicators: Retail Sales Report
    Economic Indicators: Trade Balance Report
    Economic Indicators: Wholesale Trade Report
    Economic Indicators: Business Cycle Indicators - BCI
    Economic Indicators: Composite Index of Coincident Indicators
    Economic Indicators: Arms Index - TRIN
    Economic Indicators: Employment Cost Index (ECI)
    Economic Indicators: Producer Price Index (PPI)
    Economic Indicators: Consumer Purchasing Index
    Economic Indicators: Business Optimism Index
    Economic Indicators: Global Gender Gap Index